Project cost management

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Chapter 7Chapter 7
Project Cost ManagementProject Cost Management

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The Importance of Project CostThe Importance of Project Cost
ManagementManagement
• IT projects have a poor track record for meeting
cost goals
• Average cost overrun from 1995 CHAOS study
was 189% of the original estimates; improved to
145% in the 2001 study
• In 1995, cancelled IT projects cost the U.S. over
$81 billion

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What is Cost and Project CostWhat is Cost and Project Cost
Management?Management?
• Cost is a resource sacrificed or foregone to
achieve a specific objective or something given
up in exchange
• Costs are usually measured in monetary units
like dollars
• Project cost management includes the processes
required to ensure that the project is completed
within an approved budget

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Project Cost ManagementProject Cost Management
ProcessesProcesses
• Cost Estimating - developing an approximation
of the costs of the resources needed to complete
project activities.
• Cost Budgeting - aggregating the estimated costs
of individual activities or work packages to
establish a cost baseline.
• Cost Control - influencing the factors that create
cost variances and controlling changes to the
project budget.

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Project Cost ManagementProject Cost Management
• Project Cost Management is primarily concerned
with the cost of the resources needed to complete
schedule activities.
• Project Cost Management should also consider
the effect of project decisions on the cost of using,
maintaining, and supporting the product, service,
or result of the project.

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Cost EstimatingCost Estimating
• Estimating schedule activity costs involves
developing an approximation of the costs of the
resources needed to complete each schedule
activity.
• Cost estimating includes identifying and
considering various costing alternatives.
• Cost estimates are generally expressed in units
of currency (dollars, euro, yen, etc.) to facilitate
comparisons both within and across projects.

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Cost Estimating contd.Cost Estimating contd.
• If the performing organization does not have
formally trained project cost estimators, then the
project team will need to supply both the
resources and the expertise to perform project
cost estimating activities.

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Cost Estimating: InputsCost Estimating: Inputs
1. Enterprise Environmental Factors
1. Marketplace conditions.
2. Commercial databases.
2. Organizational Process Assets
1. Cost estimating policies.
2. Cost estimating templates.
3. Historical information.
4. Project files.
5. Project team knowledge.
6. Lessons learned.

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Cost Estimating: Inputs contd.Cost Estimating: Inputs contd.
3. Project Scope Statement
4. Work Breakdown Structure
5. WBS Dictionary
6. Project Management Plan

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Cost Estimating: Tools andCost Estimating: Tools and
TechniquesTechniques
1. Analogous Estimating
– using the actual cost of previous, similar projects as the
basis for estimating the cost of the current project.
1. Determine Resource Cost Rates
– The person determining the rates or the group preparing the
estimates must know the unit cost rates, such as staff cost
per hour and bulk material cost per cubic yard, for each
resource to estimate schedule activity costs.
1. Bottom-up Estimating
– involves estimating the cost of individual work packages or
individual schedule activities with the lowest level of
detail.

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Cost Estimating: Tools andCost Estimating: Tools and
Techniques contd.Techniques contd.
4. Parametric Estimating
– Is a technique that uses a statistical relationship
between historical data and other variables (e.g.
lines of code in software development, required
labor hours) to calculate a cost estimate for a
schedule activity resource.
4. Project Management Software
– such as cost estimating software applications,
computerized spreadsheets, and simulation and
statistical tools, are widely used to assist with cost
estimating.
4. Vendor Bid Analysis

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Cost Estimating: Tools andCost Estimating: Tools and
Techniques contd.Techniques contd.
7. Reserve Analysis
– Many cost estimators include reserves, also called
contingency allowances, as costs in many schedule activity
cost estimates.
– Contingency reserves are estimated costs to be used at the
discretion of the project manager to deal with anticipated,
but not certain, events
7. Cost of Quality
– Cost of quality (Section 8.1.2.4) can also be used to
prepare the schedule activity cost estimate.

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Cost Estimating: OutputsCost Estimating: Outputs
1. Activity Cost Estimates
– is a quantitative assessment of the likely costs of the
resources required to complete schedule activities.
1. Activity Cost Estimate Supporting Detail
– The amount and type of additional details supporting the
schedule activity cost estimate vary by application area.
Supporting detail for the activity cost estimates should
include:
• Description of the schedule activity/s project scope of work
• Documentation of the basis for the estimate (i.e., how it was
developed)
• Documentation of any assumptions made
• Documentation of any constraints
• Indication of the range of possible estimates (e.g., $10,000 (-10% /
+15%) to indicate that the item is expected to cost between $9,000
and $11,500).

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Cost Estimating: Outputs contd.Cost Estimating: Outputs contd.
3. Requested Changes
– The Cost Estimating process may generate requested
changes that may affect the cost management plan,
activity resource requirements, and other
components of the project management plan.
3. Cost Management Plan (Updates)
– If approved change requests result from the Cost
Estimating process, then the cost management plan
component of the project management plan is
updated if those approved changes impact the
management of costs.

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Cost BudgetingCost Budgeting
• Involves aggregating the estimated costs of
individual schedule activities or work packages to
establish a total cost baseline for measuring
project performance.
• The project scope statement provides the
summary budget.
• However, schedule activity or work package cost
estimates are prepared prior to the detailed budget
requests and work authorization.

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Cost Budgeting: InputsCost Budgeting: Inputs
1. Project Scope Statement
2. Work Breakdown Structure
3. WBS Dictionary
4. Activity Cost Estimates
5. Activity Cost Estimate Supporting Detail
6. Project Schedule
7. Resource Calendars
8. Contract
9. Cost Management Plan

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Cost Budgeting: Tools andCost Budgeting: Tools and
TechniquesTechniques
1. Cost Aggregation
– Schedule activity cost estimates are aggregated by work packages in
accordance with the WBS.
1. Reserve Analysis
– Reserve analysis (Section 11.6.2.5) establishes contingency reserves,
such as the management contingency reserve, that are allowances for
unplanned, but potentially required, changes. Such changes may result
from risks identified in the risk register
1. Parametric Estimating
– involves using project characteristics (parameters) in a mathematical
model to predict total project costs.
1. Funding Limit Reconciliation
– the expenditure of funds is reconciled with the funding limits set by the
customer or performing organization on the disbursement of funds for
the project.

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Cost Budgeting: OutputsCost Budgeting: Outputs
1. Cost Baseline
– The cost baseline is a time-phased budget that is
used as a basis against which to measure, monitor,
and control overall cost performance on the
project.
1. Project Funding Requirements
– Funding requirements, total and periodic (e.g.,
annual or quarterly), are derived from the cost
baseline and can be established to exceed, usually
by a margin, to allow for either early progress or
cost overruns.

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Cost Budgeting: Outputs contd.Cost Budgeting: Outputs contd.
3. Cost Management Plan (Updates)
4. Requested Changes

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Cost ControlCost Control
• Project cost control includes:
– Influencing the factors that create changes to the cost
baseline
– Ensuring requested changes are agreed upon
– Managing the actual changes when and as they occur
– Assuring that potential cost overruns do not exceed the
authorized funding periodically and in total for the project
– Monitoring cost performance to detect and understand
variances from the cost baseline
– Recording all appropriate changes accurately against the cost
baseline
– Preventing incorrect, inappropriate, or unapproved changes
from being included in the reported cost or resource usage
– Informing appropriate stakeholders of approved changes
– Acting to bring expected cost overruns within acceptable
limits.

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Cost Control: InputsCost Control: Inputs
1. Cost Baseline
2. Project Funding Requirements
3. Performance Reports
– Performance reports (Section 10.3.3.1) provide information
on cost and resource performance as a result of actual work
progress.
1. Work Performance Information
– pertaining to the status and cost of project activities being
performed is collected. This information includes, but is
not limited to:
• Deliverables that have been completed and those not yet completed
• Costs authorized and incurred
• Estimates to complete the schedule activities
• Percent physically complete of the schedule activities.
1. Approved Change Requests
2. Project Management Plan

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Cost Control: Tools and TechniquesCost Control: Tools and Techniques
1. Cost Change Control System
– A cost change control system, documented in the cost
management plan, defines the procedures by which the cost
baseline can be changed.
1. Performance Measurement Analysis
– Performance measurement techniques help to assess the
magnitude of any variances that will invariably occur.
– The earned value technique (EVT) compares the
cumulative value of the budgeted cost of work performed
(earned) at the original allocated budget amount to both the
budgeted cost of work scheduled (planned) and to the
actual cost of work performed (actual).

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Performance Measurement AnalysisPerformance Measurement Analysis
• The earned value technique involves developing these
key values for each schedule activity, work package, or
control account:
– Planned value (PV). PV is the budgeted cost for the work
scheduled to be completed on an activity or WBS component
up to a given point in time.
– Earned value (EV). EV is the budgeted amount for the work
actually completed on the schedule activity or WBS
component during a given time period.
– Actual cost (AC). AC is the total cost incurred in
accomplishing work on the schedule activity or WBS
component during a given time period. This AC must
correspond in definition and coverage to whatever was
budgeted for the PV and the EV (e.g., direct hours only, direct
costs only, or all costs including indirect costs).

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Performance MeasurementPerformance Measurement
Analysis contd.Analysis contd.
– Estimate to complete (ETC) and estimate at
completion (EAC).

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Cost variance (CV).Cost variance (CV).
• CV equals earned value (EV) minus actual cost
(AC). The cost variance at the end of the project
will be the difference between the budget at
completion (BAC) and the actual amount spent.
Formula: CV= EV-AC

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Schedule variance (SV).Schedule variance (SV).
• SV equals earned value (EV) minus planned
value (PV). Schedule variance will ultimately
equal zero when the project is completed
because all of the planned values will have been
earned. Formula: SV = EV-PV

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Performance MeasurementPerformance Measurement
Analysis contd.Analysis contd.
• These two values, the CV and SV, can be
converted to efficiency indicators to reflect the
cost and schedule performance of any project.

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Cost performance index (CPI).Cost performance index (CPI).
• A CPI value less than 1.0 indicates a cost
overrun of the estimates. A CPI value greater
than 1.0 indicates a cost underrun of the
estimates. CPI equals the ratio of the EV to the
AC. The CPI is the most commonly used cost-
efficiency indicator. Formula: CPI = EV/AC

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Cumulative CPI (CPICumulative CPI (CPICC
).).
• The cumulative CPI is widely used to forecast
project costs at completion. CPIC
equals the sum
of the periodic earned values (EVC
) divided by
the sum of the individual actual costs (ACC
).
Formula: CPIC
= EVC
/ACC

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Schedule performance index (SPI)Schedule performance index (SPI)
• The SPI is used, in addition to the schedule
status (Section 6.6.2.1), to predict the
completion date and is sometimes used in
conjunction with the CPI to forecast the project
completion estimates. SPI equals the ratio of the
EV to the PV.
Formula: SPI = EV/PV

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Cost Control: Tools andCost Control: Tools and
TechniquesTechniques
3. Forecasting
– Forecasting includes making estimates or predictions of
conditions in the project’s future based on information and
knowledge available at the time of the forecast.
– Forecasting techniques help to assess the cost or the amount
of work to complete schedule activities, which is called the
EAC.
– Forecasting techniques also help to determine the ETC,
which is the estimate for completing the remaining work for
a schedule activity, work package, or control account.

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ETC based on new estimateETC based on new estimate
• ETC equals the revised estimate for the work
remaining, as determined by the performing
organization. This more accurate and comprehensive
completion estimate is an independent, non-calculated
estimate to complete for all the work remaining, and
considers the performance or production of the
resource(s) to date.
• Alternatively, to calculate ETC using earned value
data, one of two formulas is typically used:
– ETC based on atypical variances.
– ETC based on typical variances.

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ETC based on atypical variances.ETC based on atypical variances.
• This approach is most often used when current
variances are seen as atypical and the project
management team expectations are that similar
variances will not occur in the future. ETC
equals the BAC minus the cumulative earned
value to date (EVC
).
Formula: ETC = (BAC - EVC
)

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ETC based on typical variances.ETC based on typical variances.
• This approach is most often used when current
variances are seen as typical of future variances.
ETC equals the BAC minus the cumulative EVC
(the remaining PV) divided by the cumulative
cost performance index (CPIC
).
Formula: ETC = (BAC - EVC
) / CPIC

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EAC using a new estimate.EAC using a new estimate.
• EAC equals the actual costs to date (ACC
) plus a
new ETC that is provided by the performing
organization. This approach is most often used
when past performance shows that the original
estimating assumptions were fundamentally
flawed or that they are no longer relevant due to
a change in conditions.
Formula: EAC = ACC
+ ETC

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Forecasting contd.Forecasting contd.
• The two most common forecasting techniques
for calculating EAC using earned value data are
some variation of:
– EAC using remaining budget.
– EAC using CPIC.

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EAC using remaining budgetEAC using remaining budget
• EAC equals ACC
plus the budget required to
complete the remaining work, which is the
budget at completion (BAC) minus the earned
value (EV). This approach is most often used
when current variances are seen as atypical and
the project management team expectations are
that similar variances will not occur in the
future.
Formula: EAC = ACC
+BAC - EVC

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EAC using CPIEAC using CPICC
• EAC equals actual costs to date (ACC
) plus the
budget required to complete the remaining
project work, which is the BAC minus the EV,
modified by a performance factor (often the
CPIC
). This approach is most often used when
current variances are seen as typical of future
variances.
Formula: EAC = ACC
+ ((BAC - EVC
) / CPIC
)

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Cost Control: Tools andCost Control: Tools and
Techniques contd.Techniques contd.
4. Project Performance Reviews
– Performance reviews compare cost performance
over time, schedule activities or work packages
overrunning and under running budget (planned
value), milestones due, and milestones met.
– performance-reporting techniques:
• Variance analysis.
• Trend analysis.
• Earned value technique.

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Cost Control: Tools andCost Control: Tools and
Techniques contd.Techniques contd.
5. Project Management Software
– Project management software, such as
computerized spreadsheets, is often used to
monitor PV versus AC, and to forecast the effects
of changes or variances.
5. Variance Management
– The cost management plan (Section 7.1.3.4)
describes how cost variances will be managed, for
example, having different responses to major or
minor problems.

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Cost Control: OutputsCost Control: Outputs
1. Cost Estimates (Updates)
2. Cost Baseline (Updates)
3. Performance Measurements
4. Forecasted Completion
5. Requested Changes
6. Recommended Corrective Actions
7. Organizational Process Assets (Updates)
8. Project Management Plan (Updates)

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End Chapter 7End Chapter 7